In the first three quarters of 2023, the Company's performance improved quarter by quarter, and its profitability continued to pick up. Under the background of accelerating the clearing of backward production capacity, we are optimistic that the company will serve as the benchmark of domestic foundry enterprises, based on the three main businesses, improve machining capacity and realize the extension and development of upstream and downstream industrial chains. In the medium and long term, the company's product technology reserves are sufficient and the customer base is solid, which is expected to extend the product value chain vertically and expand new growth momentum horizontally. We expect the company's revenue and net profit CAGR from 2023 to 2025 to be 9% and 27% respectively, giving the company 17 times PE in 2023, maintaining the target price of 15 yuan and maintaining the "buy" rating.

23Q3 results were in line with our expectations, with a clear trend of quarterly improvement. In the first three quarters of 2023, the company realized revenue of 2.353 billion yuan (YoY-5.8%) and net profit of 282 million yuan (YoY +12.6%). Quarter by quarter, 23Q1, 23Q2 and 23Q3 realized revenue of RMB 761 million yuan (YoY-14.0%), RMB 774 million yuan (YoY-10.1%) and RMB 818 million yuan (YoY +8.9%) respectively, and realized net profit of RMB 77 million yuan (YoY-23.6%), RMB 100 million yuan (YoY+25.3%) and RMB 105 million yuan (YoY +50.1%) respectively.

The improvement of gross profit margin of compressor parts and the contraction of low gross profit margin businesses such as pig iron and renewable resources have driven the continuous improvement of profitability of the Company. The gross profit margin of the Company in 23Q1, 23Q2 and 23Q3 is 21.7%, 25.1% and 27.3% respectively; the gross profit margin of the Company in the first three quarters of 2023 reaches 24.7%(compared with +5.91pcts for the whole year of 2022). In 2022, the Company has made relatively large provision for impairment of inventory and goodwill. The performance in the first three quarters of 2023 has been in the process of improving month-on-month, and 23Q4 is expected to continue to maintain the trend of quarterly recovery.

Vertical extension of product value chain, horizontal expansion of new growth momentum. (1) Through the gradual production of "IPO+ convertible bonds" two investment projects, the company is expected to realize 100% machining of compressor parts blank products and continuously improve profitability; In 2022, the Company further extended its product processing industry chain and completed the technological breakthrough and market development of the "compressor pump assembly" process, which not only achieved a breakthrough in the assembly process from "0" to "1" within the Company, but also pioneered the supply model of "component delivery" in the industry. (2) In 2023, the company continued to expand horizontally, successfully entered the washing machine parts supplier system, and improved the diversification of product categories; in the field of automobile parts, the company also completed the small batch delivery and audit certification of a number of "lightweight material castings", and will continue product development and market development; According to the company announcement, the company has established school-enterprise cooperation with Taiyuan University of Technology and other universities, started research and development of magnesium-aluminum alloy, titanium alloy and other material products, and deepened the development strategy of diversified products of the company.

The controlling shareholder plans to subscribe for the fixed increase in full, demonstrating the confidence of the company in its development. According to the Prospectus for Issuing Stock Securities to Specific Objects (Application Draft) issued by the Company on September 20,2023, the Company plans to issue no more than 36.63 million shares to Huaxiang Industrial, the controlling shareholder, at an issue price of 8.19 yuan/share, and the total amount of raised funds shall not exceed 300 million yuan. The Group will continue to invest in the Group's financial assets and liabilities. The controlling shareholder plans to subscribe in full, demonstrating confidence in the future development of the company.

The company's revenue is expected to continue to benefit from increased industry concentration and steady growth in downstream demand for its three core businesses. The global casting market production capacity is stable, and the proportion of China's output continues to increase; under the adjustment of supply-side structure, the backward production capacity is accelerated to clear, and the market share of head enterprises is expected to increase. China's white home appliance market boom is good. According to the data of the National Bureau of Statistics, the cumulative output of air conditioners in China reached 193.662 million units in the first three quarters of 2023, with a year-on-year growth of 13.7%. Overseas construction machinery sales are expected to maintain a moderate recovery trend overall, Off-Highway Research expects 2021-2026 global construction machinery sales excluding China CAGR of 2.55%. The growth rate of China's auto parts industry is higher than that of China's whole vehicle industry. According to the data of China Automobile Association, the sales revenue of auto parts in China increased from 3.46 trillion yuan to 4.90 trillion yuan from 2016 to 2021, and CAGR was 7.0%. We expect revenues to continue to benefit from increased industry concentration and steady growth in downstream segments.

Risk factors: the risk of deterioration of the macroeconomic environment; the risk of intensified market competition; the risk of fluctuations in raw material prices; the risk of large changes in exchange rates; the risk that the implementation progress or effect of the company's fund-raising projects is not as good as expected; the growth of downstream demand is not as expected.

Investment suggestion: Under the background of accelerating the clearing of backward production capacity, we are optimistic about the company as a benchmark for domestic foundry enterprises, based on the three main businesses, improving machining capacity and realizing the extension and development of upstream and downstream industrial chains. In the medium and long term, the company's product technology reserves are sufficient and the customer base is solid, which is expected to extend the product value chain vertically and expand new growth momentum horizontally. Due to the further improvement of the company's profitability, we adjusted the EPS forecast of the company from 2023 to 2025 to 0.89/1.06/1.22 yuan respectively (the original forecast value was 0.87/1.05/1.21 yuan). We expect the company's revenue and net profit CAGR for 2023-2025 to be 9% and 27% respectively. Comparable companies Henggong Precision, Liande Shares and Mingzhi Technology unanimously expect PE average value to be about 23x in 2023 Wind. Considering that comparable companies are more involved in popular tracks such as wind power and photovoltaic, while the company mainly cultivates traditional fields, it will give the company 17 times PE in 2023, maintain the target price of 15 yuan, and maintain the "buy" rating.